Hwacheon Machinery America, Inc. v. Synergy Machine Sales Inc. et al.

[Indexed as: Hwacheon Machinery America, Inc. v. Synergy Machine Sales Inc.]

Ontario Reports Ontario Superior Court of Justice D.E. Harris J. July 17, 2020 152 O.R. (3d) 98 | 2020 ONSC 4312

Case Summary

Civil procedure — Default judgment — Setting aside — Plaintiff suing corporation and two corporate officers — One officer subsequently buying out the other — Officer who sold his shares not receiving information about litigation as documentation sent to wrong address — Plaintiff obtaining default judgment against all three defendants — Default judgment set aside against defendant who had no actual notice of the proceedings through no fault of his own.

The plaintiff was a machine tool distribution company operating in Illinois. The personal defendants M and B were officers, directors and shareholders of an Ontario corporation, the defendant S. In 2016 the plaintiff filed a statement of claim for damages for breach of trust in respect of an alleged failure to pay for machines purchased from the plaintiff. In 2017, M bought B out of the company by way of a share purchase agreement in which M and S agreed to release and indemnify B in respect of all indebtedness and obligations of S. M also told B that he would take care of the plaintiff's action. In 2018, counsel for the defendants sought to get off the record. The notice of motion and motion record did not have B's correct address. The motion was granted and the order was sent once again to an incorrect address for B. Amendments to the statement of claim made without notice to B fundamentally changed the cause of action from breach of trust to oppression and improvident distribution of dividends. The statement of defence and counterclaim were struck out and default judgment was granted against all three defendants. The plaintiff delivered a notice of garnishment and writs of seizure and sale to B at his correct residential address. B moved to set aside the order for default judgment against him and associated orders flowing from it.

Held, the motion should be allowed.

B did not have actual notice of the proceedings in which he was found in default and judgment awarded against him. It was clear that B relied on M's assurances that he would take care of the action. B also reasonably relied on his counsel to keep him apprised of the status of the action against him and the lawyer failed to do so. B had no reason to believe that his reliance was ill-advised. It appeared that B's lawyer simply used the incorrect address for B that was on the statement of claim. The absence of actual notice to B was not due to any evasive action or misconduct on his part and as such he was entitled to have the default judgment set aside, along with the order striking the statement of defence and counterclaim. The writs of seizure and sale and the notice of garnishment were vacated.

[page99]

Cited Cases

Other cases referred to

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16, s. 30

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 16.07, 19.08

Motion

MOTION to set aside default judgment.

Counsel: M.A. Vermette, for plaintiff, respondent on the motion. T. Gleason, for defendant Daniel Brewer, applicant on the motion.

[1] D.E. HARRIS J.: — The defendant, Daniel Brewer ("Brewer"), moves under rule 19.08 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 to set aside an order for default judgment made against him and associated orders following from it.

[2] The application is allowed. One crucial error upended the apple cart in this litigation and requires the relief sought by the defendant.

Summary of the Evidence

[3] The plaintiff Hwacheon Machinery America Inc. ("Hwacheon") is a machine tool distribution company which at the time was carrying on business in Lincolnshire, Illinois. The defendant Synergy Machine Sales Inc. ("Synergy") is an Ontario corporation. It was party to a Sales Representative Agreement with the plaintiff in [page100] 2014 and 2015. MacAllister and Brewer were officers, directors and shareholders of Synergy. On May 5, 2016, Hwacheon filed a statement of claim against Synergy, MacAllister and Brewer alleging breach of trust and claiming damages in the amount of $926,055.39. It was alleged that the defendants had not paid for a number of machines purchased from Hwacheon.

[4] There was a small, seemingly insignificant error in the statement of claim which likely went undetected by anyone. While the statement of claim contained MacAllister's correct home address, the address for Brewer was not his home address but a former address for Synergy. Synergy had moved to a new location by the time the statement of claim was drawn up.

[5] In order to mount a defence, on May 31, 2016, MacAllister and Brewer retained a lawyer by the name of Ralph Swaine of Nanda and Associate Lawyers to act in their defence. Brewer says he provided Swaine with his photo identification and his contact information. A statement of defence was filed in July of that year and further steps in the litigation were taken in the usual manner.

[6] On June 1, 2017, MacAllister bought Brewer out of Synergy by way of a share purchase agreement. His shares were sold and Brewer resigned as a director. As a term of the Share Purchase Agreement, MacAllister and Synergy agreed to release and indemnify Mr. Brewer in respect of all Synergy's indebtedness and obligations. Obligations to the plaintiff Hwacheon were specifically included in this term. In his cross-examination for this motion, Brewer testified that he believed this release legally absolved him of all liability for the action brought by Hwacheon against him. This, of course, was incorrect.

[7] According to Brewer, shortly after the sale of his interest, MacAllister told Brewer he would take care of the Hwacheon suit. Brewer testified that because of this assurance and, implicitly, because he had retained counsel to defend the action, Brewer believed that the matter required no further attention from him. MacAllister was discovered in the fall of 2017, after Brewer had left the company. MacAllister, in his discovery, testified that the parting between himself and Brewer was acrimonious.

[8] There is a suggestion that steps were taken to discover Brewer around this time but he denies he was ever contacted by anyone. Based on the evidence tendered on this motion, I do not believe he was contacted.

[9] The crucial misstep in this action took place when Nanda and Associate Lawyers made an application to get off the record a year later, in early July of 2018. They had, according to Brewer, not been in touch which him since he left Synergy one year before. Nor had Brewer been in touch with them, believing that he had nothing [page101] further to be concerned about. The misstep was that the notice of motion and the motion record to be removed from the record used the wrong address for Brewer, the former address of Synergy. It is likely that the erroneous address on the statement of claim was used. Brewer never received the documents.

[10] In late July of 2018, the unopposed motion to be removed was granted. The order indicating that the firm had been removed from the record was sent to Brewer but again at the wrong address. That Brewer never received either the notice of the motion or the resulting order cannot be disputed.

[11] Brewer's default followed perforce. Amendments to the statement of claim made without notice to Brewer fundamentally changed the cause of action from breach of trust to oppression and improvident distribution of dividends. The statement of defence and counterclaim were struck out. On August 15, 2019 default judgment was granted against all three defendants, including Brewer.

[12] On August 29, 2019, the plaintiff delivered a notice of garnishment and writs of seizure and sale to Mr. Brewer at his correct residential address. In a search for his assets, his correct address had been discovered. Brewer attests that he had lived at this address for 20 years. Brewer immediately went about retaining counsel. Several of the lawyers he contacted had to withdraw because of conflicts. And it took some time to garner the necessary information to bring this motion. But by late November the notice of motion for this proceeding was served.

The Law

[13] Rule 19.08 of the Rules of Civil Procedure permits the setting aside of a default judgment on such terms as are just. The most recent enunciation of the applicable multi-part test is from the Court of Appeal judgment in Mountain View Farms Ltd. v. McQueen (2014), 119 O.R. (3d) 561, [2014] O.J. No. 1197, 2014 ONCA 194 (C.A.), at paras. 48-49:

(a) whether the motion was brought promptly after the defendant learned of the default judgment; (b) whether there is a plausible excuse or explanation for the defendant's default in complying with the Rules; (c) whether the facts establish that the defendant has an arguable defence on the merits; (d) the potential prejudice to the moving party should the motion be dismissed, and the potential prejudice to the respondent should the motion be allowed; and [page102] (e) the effect of any order the court might make on the overall integrity of the administration of justice.

[14] These should be treated as pertinent factors, not as rigid rules. The ultimate standard is whether the interests of justice require granting an order to set aside: Mountain View, paras. 47, 50.

[15] In the circumstances of this case, two facts dominate the analysis and dictate the result. First, Brewer reasonably relied on his counsel to keep him apprised of the status of the action against him. Second, as a result of the failure of counsel to keep him up to date, Brewer did not have actual notice of the proceedings in which he was found in default and judgment awarded against him. The reflection that most individuals in his position would have suffered anxiety from the prospect of having to pay an almost $1 million award and would have kept themselves abreast of the progress of the action does not avail the plaintiff. Brewer hired counsel and placed reliance on him to take care of the matter for him. He had no reason to believe that this reliance was, as events transpired, ill-advised.

[16] There a slew of cases that hold that when a party takes a calculated risk to sit back and do nothing, they must endure the consequences. A default judgment ought not to be set aside: Sunlife Assurance Co. of Canada v. Premier Financial Group Inc. (c.o.b. Premier Financial), [2013] O.J. No. 1107, 2013 ONCA 151 (C.A.); 420-450 Britannia Road East Ltd. v. Kennedy Transportation Network Ltd., [2015] O.J. No. 1367, 2015 ONSC 1791 (S.C.J.), at para. 54. Those cases have no resemblance to a case like this one where Brewer had no knowledge that the case was proceeding against him.

[17] While it is clear that Brewer relied on MacAllister's assurance that he would take care of Hwacheon's action against them, it must be inferred from Brewer's evidence that he also relied on his lawyer as is only reasonable. The sins of the lawyer should not be visited upon the client: Labelle v. Canada Border Services Agency, [2016] O.J. No. 1166, 2016 ONCA 187 (C.A.), at paras. 35-36; Halton Community Credit Union Ltd. v. ICL Computers Canada Ltd., 1985 CarswellOnt 357 (C.A.), at para. 11; Jerez v. Kong, 1993 CarswellOnt 435 (Gen. Div.), at paras. 3-4.

[18] This case, like Labelle, is easily distinguishable from Marché D'Alimentation Denis Thériault Ltée v. Giant Tiger Stores Ltd. (2007), 87 O.R. (3d) 660, [2007] O.J. No. 3872, 2007 ONCA 695 (C.A.). In Giant Tiger, counsel deliberately sat on the file for a number of years. The court of appeal characterized the failure as more than mere inadvertence. Policy considerations and the maintenance of public confidence in the administration justice came to the fore [page103] (see paras. 30-33). In this case, it was mere inadvertence on the lawyer's part, not deliberate misconduct which led to the default.

[19] The lawyer was obligated under Law Society of Ontario By-Law 7.1, Part III, to identify the client by an identifying document. This obligation tends to confirm Brewer's evidence that he supplied counsel with identification with his home address on it. Alternatively, if counsel did not have the home address for some reason, he could easily have obtained it from Synergy or MacAllister. As it was, it appears that Brewer's lawyer simply referenced Hwacheon's statement of claim and used the incorrect address that was listed there. In serving documents as important as an application to be removed from the record, particularly because he had been out of touch with Brewer for a considerable period of time, this was clearly unsatisfactory.

[20] In any case, no matter how it is characterized, Brewer did not have actual notice of the proceedings. This was not due to any evasive action or misconduct on his part. As a consequence, Brewer falls within the case law establishing that if a defendant does not have actual notice of a proceeding through no fault of their own, the default judgment must be set aside on the basis of this fact alone: see BHL Capital, a Division of Berner Holdings Ltd. v. 2281165 Ontario Ltd., [2018] O.J. No. 7060, 2018 ONSC 7289 (S.C.J.), at paras. 23-26; Don Bodkin Leasing Ltd. v. Rayzak, [1993] O.J. No. 503, 4 W.D.C.P. (2d) 135 (Gen. Div.); Teskey v. Peraan, [1999] O.J. No. 1801, 34 C.P.C. (4th) 333 (S.C.J.), at paras. 28-30; Royal Trust Corp. of Canada v. Dunn (1991), 6 O.R. (3d) 468, [1991] O.J. No. 2231 (Gen. Div).

[21] Notice is the sine qua non of procedural fairness. If a litigant is unaware of a proceeding, he or she cannot have their proverbial day in court. It is a first-order procedural right: 40 Park Lane Circle (Receiver of) v. Aiello, [2020] O.J. No. 240, 2020 ONCA 33 (C.A.), at paras. 47-48; Adams v. Fuda, [1987] O.J. No. 1311, 1987 CarswellOnt 3570, 5 A.C.W.S. (3d) 207 (S.C.), at para. 17. There is not only a plausible explanation for the default under the second test in Mountain View, there is a definitive explanation. On this ground alone, the interests of justice require the relief requested by the defendant Brewer be granted.

[22] The respondent argues that there was no procedural irregularity because there was proper service. That cannot be right. Under rule 16.07, the defendant has demonstrated that he did not have actual notice. This is a fundamental flaw.

[23] To briefly address the other considerations Price J. in BHL Capital holds that even if notice is deficient, if the party rests on her laurels for a lengthy period of time, this could influence the outcome of a motion to set aside a default judgment (see BHL, at para. 27). [page104] An example is HSBC Securities (Canada) Inc. v. Firestar Capital Management Corp., [2008] O.J. No. 5345, 2008 ONCA 894 (C.A.), at paras. 31-32. That is not the case here. Brewer experienced some difficulty in retaining counsel. Two firms were conflicted out and, because he was a defendant, he was probably not the most attractive client. In the circumstances, the three-month delay in filing the motion to set aside was not undue. Brewer was reasonably diligent in challenging the judgment against him.

[24] With respect to the merits of the defence, for the reasons stated, I would give no weight to this factor in light of the absence of actual notice beginning with the motion to amendment of the statement of claim and everything that followed it, including the noting in default and the judgment in default: Redabe Holdings Inc. v. I.C.I. Construction Corp., [2017] O.J. No. 5707, 2017 ONCA 808 (C.A.), at para. 7. In any case, Brewer is in the dark and is majorly disadvantaged in demonstrating a defence for the purpose of this motion as he does not have access to Synergy's books and records. It would be unfair to expect him to be specific with respect to his defences. Moreover, the claim, as amended, now alleges that dividends were improvidently paid to Brewer when the debt to Hwacheon was outstanding contrary to s. 30 of the Business Corporations Act, R.S.O. 1990, c. B.16. That is not a simple route of liability for the plaintiff to prove. There is an air of reality to the plaintiff failing in its proof.

[25] The plaintiff's argument upon this hearing was that Brewer's credibility was poor and the result should be the dismissal of his requested relief. However, the lack of actual notice does not depend on the credibility of Brewer. It was manifest from the wrong address for the service of documents. There is nothing to the contrary which suggests that Brewer did, despite his testimonial denials, have actual notice and was laying in the weeds.

Orders

[26] The order of van Melle J., dated April 23, 2019, striking out the statement of defence and counterclaim of the defendants is set aside; the noting of Daniel Brewer in default is set aside; the default judgment of Trimble J., dated August 15, 2019, against Brewer is set aside; Brewer is granted leave to deliver a statement of defence and counterclaim; and the writs of seizure and sale dated August 21, 2019 and the notice of garnishment dated August 28, 2019 no longer having a foundation in law after the setting aside of the default judgment, are therefore vacated. [page105]

[27] If costs cannot be agreed upon, the defendant shall deliver submissions of not more than two pages, excluding the bill of costs, within 30 days; the plaintiff shall have the same limit and shall file within 20 days of the defendant.

Motion allowed.

End of Document

Hwacheon Machinery America, Inc. v. Synergy Machine Sales Inc., 2020 ONSC 4312

Case Summary

Hwacheon Machinery America, Inc. v. Synergy Machine Sales Inc. et al.

Case Summary

Cited Cases

Other cases referred to

Statutes referred to

Rules and regulations referred to

Motion

Summary of the Evidence

The Law

Orders

Judge

Counsel

Parties

Areas of Law